Tax Avoidance and Evasion

Catherine McKinnell Excerpts

Thursday 13th September 2012 Commons Chamber

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

I commend my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) for securing this debate on a matter that we all agree has rightly risen to a high place on the political agenda. There is much that we can agree on today, and I think we all agree that Parliament is at its best when we agree on matters and stand together to improve them.

We have heard well considered and valuable contributions from many respected voices in the Chamber, but I want to pay particular tribute to my right hon. Friend the Member for Barking (Margaret Hodge), whose work with the Public Accounts Committee has helped to shed a lot of light on these issues. She made a powerful and sensible speech.

The financial crisis of 2008 led to a radical domestic and international shift in the approach to tax evasion and avoidance. The lack of transparency in the international financial system was rightly identified as a significant threat to global financial stability, and calls for change rightly came from all sides. The crisis has also led to the significant challenge of public expenditure reduction that we now face, which adds to the urgency of ensuring that every individual pays their fair share of tax and contributes to that effort.

As many Members have said, among the majority of hard-working people who pay all their taxes there is understandably growing hostility towards those who manage to avoid paying their fair share. Given that the Government are facing an increase in their borrowing—it is up by a quarter on last year’s forecast, partly as a result of falling tax-takes—I have no doubt that the issue has also risen high on the Government’s agenda.

The Government have measured the tax gap—the difference between tax owed and collected—at about £35 billion. There has been some debate about that figure today, and there are other estimates. The TUC’s estimate is much larger, as is that of the Tax Justice Network, which puts the figure in the region of £120 billion. We all appreciate that it is not an exact science, but whatever the figure, we accept that a significant proportion of the tax revenue that is due is going uncollected. If we closed the tax gap by half or even a quarter, we would avert real pain and suffering among the most vulnerable in our society, who rely on the services provided through public expenditure.

Members have rightly drawn a clear distinction between evasion and avoidance, and we need to remember that a small minority of people are involved. However, it is clearly not acceptable for those people to think that they can get away with avoiding their obligations if they buy the right advice or pay for sophisticated tax avoidance products.

Like benefit fraud, tax evasion—and avoidance in some cases—undermines the confidence of ordinary taxpayers in the legitimacy of the system. I think we all agree that the world has changed and that there should be no hiding place for tax cheats. The previous Labour Government had a record to be proud of in tackling avoidance, both domestically and internationally. Many of the comments today have paid tribute to that. In 2004, we introduced a requirement to disclose tax avoidance products in advance, to, I remind Members, a storm of protest. In 2009, we strengthened the regime and that has transformed the fight against avoidance—I am sure that the Minister and Members on both sides of the House would agree with that. More than 2,000 schemes had been identified up to March this year, protecting more than £12 billion of revenue.

In 2009, we also set up the high net worth unit and have received the good news this week that an extra £500 million in tax has been identified and recovered. When in government, we also introduced a code of conduct on tax for banks, as well as legislating on debt buy-back and credit loopholes that some companies were exploiting. I know that the Minister recognises the value of the steps we took in government to make progress on this issue and over a 10-year period we recovered more than £16.4 billion in particular targeted tax avoidance measures.

Internationally, as president of the G20 we led a global clampdown on tax havens and offshore evasion. As many hon. Members have said, that is an important aspect of what we must do if we are to close the tax gap. Similarly, I would be interested to hear comments from the Minister today about the measures he is considering to enter into international agreements along the lines of the agreement we negotiated with Liechtenstein and between the UK authorities and Belize. How much revenue does he consider has been saved through those agreements and what plans do the Government have in place to continue that work and to try to shut down some of the avoidance measures and tactics that are being exploited?

In government, Labour also persuaded the OECD to develop best practice guidelines on country-by-country reporting, an excellent initiative that was put on the agenda by international development organisations, particularly Christian Aid, ActionAid and Oxfam. Tax evasion costs developing countries billions of pounds every year in lost revenues and is a barrier to social and economic development, but in the Finance Act 2012 we saw changes to the controlled foreign company rules and many charities have expressed concerns that they will make it easier for UK companies to avoid paying tax in developing countries in which they own subsidiaries. ActionAid estimates the potential loss to developing countries as up to £4 billion a year, whereas the Government estimate is £1 billion. Either way, that change raises huge concerns; steps must be taken to improve transparency and the Treasury must work with the Department for International Development to ensure its commitment to combining tax and development policy. What plans does the Minister have in place to ensure that the new rules will not damage developing countries’ tax revenues? Has he had discussions with the new Secretary of State for International Development or with her Ministers on a joint strategy on this point? If it becomes clear that the changes are enabling and facilitating tax avoidance, what action will he take? At what stage will he check, as this is a matter of some urgency for those who are concerned?

Unfortunately, on a domestic level, the Government’s general anti-abuse rule is unlikely to take forward the battle against tax avoidance. It is disappointingly narrow, designed by its own admission to tackle only the most egregiously abusive tax avoidance schemes, whatever that means. I would be grateful if the Minister clarified that point. The union representing top officials at HMRC, the Association of Revenue and Customs—ARC—has even suggested that it could encourage tax avoidance by implying that anything outside its scope is legitimate tax planning and immune from scrutiny. Will the Minister clarify what constitutes—I quote from the Government’s consultation document—a “wholly unacceptable” tax avoidance scheme, and tell us how “abusive” will be defined? I have read the consultation document and the definitions proposed within it shed little light.

In its draft legislation, the Treasury defines non-abusive schemes as anything that is “reasonably regarded as reasonable”—I am paraphrasing for brevity. That provides neither clarity on the matter, nor armour for HMRC, which is more concerning. We know that one person’s tax planning is another person’s tax avoidance, and even when it is entirely legal, it is considered by many—including the Prime Minister and the Chancellor—as wrong or “morally repugnant”. Will the Government’s proposed legislation help to draw a clearer line? All the moral indignation in the world will not bring in more tax receipts, and clarity is essential.

Will the Minister confirm what proposals there are to levy penalties on those found in contravention of the new anti-abuse rule? There is widespread concern that the proposed legislation is nothing but a toothless tiger, or worse,

“a Trojan horse, which suggests tough action while actually facilitating avoidance.”

They are not my words but those of Graham Black, president of the Association of Revenue and Customs, which represents senior HMRC officials.

I congratulate my right hon. Friend the Member for Oldham West and Royton on his contribution to the debate and on laying his draft legislation before the House tomorrow. His Bill takes a much broader approach, and seeks to tackle not only abuse but more general avoidance, and it lays down the mantle at the Government’s door for them to clarify what they deem to be legally acceptable. It also seeks to give HMRC much wider powers than under the Government’s plan, and I would be interested to hear the Government’s response to the challenge posed by my right hon. Friend.

Finally, as many hon. Members have said, even with a proper anti-avoidance or anti-abuse scheme in place we will require a top-level agency to collect tax. HMRC has recently had a welcome public success in collecting revenue from top earners, but we know that it is struggling to maintain performance against huge job cuts. In May this year the Public Accounts Committee found that an extra £1.1 billion could have been collected if personnel had been left in place, and it called on the Government to consider the true value for money of further cuts. Have the Government done that? What consideration have they given to value for money in terms of personnel and the proposed cuts? If cutting staff means missing out on billions of pounds of tax revenue it is a false economy, and I would be interested to know what assessment the Government have made in the light of the report by the Public Accounts Committee.

Ministers say that they want to eliminate tax avoidance, but with an incredibly narrow GAAR, weak international agreements, and without giving proper resources to HMRC, the Government are not on track to succeed. The nation’s books will be balanced on the backs of the poorest in society, rather than on the rich who will continue avoiding their taxes.